Silicon Valley is the best place for startups to get off the ground and go global, but high housing prices can put off the average entrepreneur. The ecosystem where companies like Zoom can rise from nothing to the top is multifactorial, but what is the real secret recipe behind this global tech hub? We have highlighted the strengths and challenges of the San Francisco Bay Area to find out.
The secret of Silicon Valley
There was no intentional plan to create Silicon Valley by the government. It just spontaneously evolved, although some factors led to the development and growth of the area. Firstly, the weather. It is usually lovely and clement in Silicon Valley, attracting people to live there. Secondly, the top universities in the area are even more essential: Silicon Valley has several outstanding higher education institutions. For instance, Stanford University is often referred to as one of the top universities in the world. Many of the companies that were founded here have some links to Stanford. Stanford students or graduates established Google, Cisco, Microsoft, and hundreds of other companies. The founders of Google worked together with their professors from Stanford. They played an active role in the company, just as in the case of many of the companies founded in Silicon Valley. Universities in Silicon Valley usually have direct or indirect links to the companies founded here.
Another vital factor is immigration policy. If a person wants to move to the United States, they must go through the complex federal immigration process, But the US has had visa programs for years that have allowed skilled workers from around the world to get visas. One example is the H-1B, which has supported many Silicon Valley companies. People who come to Silicon Valley under this visa program may be allowed to qualify eventually for US citizenship. So, Silicon Valley was built to attract educated people from all over the world to move there. It is an open and inclusive environment.
California is a gateway from Asia
Silicon Valley has no defined boundaries; the term is a description of an area, not a specific geographic region. Over the years, people who lived outside of the traditional core of Silicon Valley started to claim that their neighborhoods are also part of the area. Thus, Silicon Valley expanded, but San José is still its non-official capital.
San José is the 10th largest city in the US and the 3rd largest in California. The population of the metro area is 1,809,000. The city has a diverse population; roughly 40% of the residents were born outside the United States. They arrived from places worldwide; approximately one-third of the population is Asian, one-third is Hispanic or Latino, and one-third is Non-Hispanic White. California, in general, has a large Asian population since the state is a gateway from Asia to the US. Asians account for only 5.6% of the US population, but they make up more than 50.1% percent of the tech workers in Silicon Valley. The proportion of Latinos is above average in California and the Southwest, primarily because of Mexican and Central American immigrants.
The American education system is very different from the Asian one, especially from the Chinese. In America, the goal is to help students learn and grow, not just memorize the material. As a result, young Americans are more innovative, and when they grow up, they can become entrepreneurs more easily. In China, material knowledge is appreciated more. The two attitudes meet in Silicon Valley, and their combination puts the region at the world’s top.
The support first came from the state and the city
Silicon Valley and San Francisco account for about 75% of the venture capital investments made in California and about 35% nationwide. The San José City Council established unique, industry-specific incubators twenty-five years ago. Software entrepreneurs could join the software incubator, and later, incubators for environmental technology startups and biotech companies were also established. The city wanted to support business entrepreneurs who could develop high-growth potential companies which could create jobs. The city’s redevelopment agency paid the lease on the buildings for the companies, lowering the businesses’ costs in the incubator program. The companies paid rent, but it was subsidized since they did pay less than the market rates. Nonetheless, they could not stay for long, only for a year or two, the exact period depending on their growth. When they had more employees and thus, needed more space, they “graduated” from the incubator program and moved out.
Today there are many private business incubators and co-working spaces in the region, so the city’s incubators lost their relevance. Approximately ten years ago, California eliminated redevelopment agencies statewide. San José winded down as they lost the business incubator programs’ funding source.
Apart from incubators and other support institutions, the evolution of the venture capital industry, where individuals invest in startups, has also been essential. When a company in the US has sought funding, they have either used what they have raised themselves or got a take-out loan. The logic of venture capital is completely different, as investors are essentially investing in an idea created by entrepreneurs. They believe that these ideas will be later successful and make money. Venture capitalists accept that many of their investments will fail, but if they invest in a company like Google, the success of the investment on that will compensate them for all their losses in the failed companies. The heart of the American venture capital industry is in Silicon Valley, as venture capitalists like to be close to the entrepreneurs since they often take an active role in the companies they invest in. In addition to the venture capital firms, the so-called angel investors have a crucial role. It is a less formal way of funding when wealthy individuals invest money in young companies or startups to support and help them through the challenging phases.
You will not be taken seriously unless you have at least three failed startups.
Silicon Valley has a unique business culture that many other regions have taken over. Therefore, the Silicon Valley model is not as unique as it once was. In Silicon Valley, it was usual for people to work for a company for a few years, then they left to start their own company by building a team around themselves, while in other parts of the US and most countries around the world, employees worked for a company for a longer time. The ecosystem of Silicon Valley encourages entrepreneurs to take risks and start new companies. The investors and other market participants are not seeing it as a problem if young entrepreneurs’ first attempts fail. Everybody wants to be successful, but even the best companies fail. Apple’s story is an excellent example of that.
High wages, but high housing prices as well
Workers in the San Francisco Bay Area are among the highest-paid in the US, and productivity levels are also much higher here than elsewhere. Nonetheless, people who try to start a business here or relocate will likely be shocked by the housing costs, which are among the highest in the country. Silicon Valley is where the US Patent and Trademark Office grants the most patents each year. This signals that the place is a heaven for innovation.
Nonetheless, a significant proportion of the population is less skilled. The wage gap grows between the top management and average workers and between average workers and those working in service industry jobs too. But even workers in service-type jobs have much higher salaries or hourly wages than those outside Silicon Valley. The American federal minimum wage has not gone up in years. But 42 of the 50 U.S. states have state minimum wages. The federal government has set a minimum wage of $7.25 an hour, but California has a much higher minimum wage of $15.
Despite the high wages, building more houses in California is particularly challenging, leading to astronomical housing costs. The most pressing urban problem in the state is probably addressing homelessness. In Santa Clara County in 2019, 4,771 homeless people were registered, but their number has declined in the past two years. In Los Angeles and San Francisco, there are many more homeless people.
In San José, there are programs that provide job training, job placement, and job assistance for people who have lost their jobs. Therefore, there are ample opportunities for people who want to work. California has a large-scale two-year community college program as well.
The future of the San Francisco Bay Area and San José in particular.
One of the significant projects that the San José City Council is working on is a collaboration with Google. Google plans to build a campus in downtown San José, bringing roughly 25,000 jobs to the city. The city has the means to build on the companies that want to grow. Some towns in Silicon Valley are basically full; they do not have room for the buildout of companies. Another interesting trend is that recently many companies are leaving the Bay Area for Texas. This shift can be explained by the combination of high regulations and taxes in California and a more business-friendly environment along with a lower cost of living in Texas.